Goetz Fitzpatrick, LLP recently prevailed on a cross-motion to compel a construction manager (CM) as agent for a disclosed principal to arbitrate the Third-Party claims of a trade contractor client, even though direct privity of contract between the CM and trade contractor was questionable.
Where the CM acts as agent for a disclosed principal (the owner), standard language in the construction management agreement (CMA) usually provides:
Notwithstanding anything to the contrary which may be set forth in this Agreement, it is expressly acknowledged and agreed that the Construction Manager is acting as agent for Owner and all benefits of this Agreement shall run to the Owner as if the Owner were a signatory hereto.
It is also standard form that trade contracts entered into between the CM as agent for owner are signed by the “[the CM] As Agent for Owner.”
The obvious purpose of such language and manner of execution of the CMA is to attempt to shield the CM as agent from any direct claims and/or liability asserted by any of the trade contractors since it is long-established that an agent which signs a contract on behalf of a known principal cannot be held to have made a commitment in its individual capacity. (See e.g., Shoenthal v. Bernstein, 276 A.D. 200, 205, 93 N.Y.S.2d 187 (1st Dept 1949), appeal dismissed 276 A.D. 831, 93 N.Y.S.2d 908). This principle has been consistently applied in the context of arbitration. (See e.g. Matter of Metamorphosis Constr. Corp. v. Glekel, 247 A.D.2d 231, 668 N.Y.S.2d 594 (1st Dept 1998).
However, that consistency is no longer a constant, thanks to the compelling arguments provided to the Commercial Division of the New York County Supreme Court by attorneys from Goetz Fitzpatrick.
In Sciame Construction, LLC v. Accurate Specialty Metal Fabricators, Inc., NY Co. Index No. 655666/2021, Sciame Construction LLC (“Sciame”) commenced an arbitration “on behalf of owner” against Accurate Specialty Metal Fabricators, Inc. (“Accurate”). Accurate, in turn, asserted Third-Party claims against Sciame for breach of the trade contract. Sciame then filed a Petition to stay the Third-Party claims in arbitration based on the premise that Sciame was merely an agent for a disclosed principal and, as such, there was no contract between Sciame and Accurate which would subject Sciame to arbitrate the claims directly with Accurate.
Goetz Fitzpatrick filed a cross-motion to the Sciame Petition and argued, among other things, that Sciame cannot avoid arbitration of Accurate’s Third-Party claims because Sciame obtained direct benefits from both the construction management agreement and the subcontract, both of which contained arbitration clauses. In other words, Sciame was stopped from avoiding arbitration. The Court agreed and specifically ruled that “even if Sciame was not in privity with Accurate due to it having entered into the Subcontract as agent of Owner, Sciame received direct benefits from the CMA and the Subcontract – serving as the Construction Manager and being entitled to a Construction Services Fee based on work performed by Accurate under the CMA – such that it is estopped from disputing that it is subject to the broad arbitration clauses [citations omitted].”
In short, there is now clear case law from the Commercial Division, New York County, that a CM as agent for owner cannot avoid arbitration of direct claims asserted by a trade contractor where the CM has received a benefit from the CMA and/or trade contract.
The attorneys on the case were Donald J. Carbone and Gerard S. Strain.
Goetz Fitzpatrick LLP has been offering clients insightful solutions throughout the New York Metropolitan area since 1967. The firm provides its clients with expertise in the areas of Construction and Real Estate, Trusts & Estates Administration & Litigation, Commercial Litigation, Corporate, Bankruptcy, and Labor & Employment. The firm’s office is located at One Penn Plaza, Suite 3100, New York, NY 10119, Telephone 212 695 8100, [email protected], www.goetzfitz.com. You can learn more about Goetz Fitzpatrick on: LinkedIn | X (Twitter) | Soundcloud | YouTube | Facebook | Instagram
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